What is a Trust?November 8, 2018
by Corrina Judd, J.D.
Assistant Vice President & Estate Officer
Trust Legal, Tax & Estates
The National Bank of Indianapolis
What is a trust?
If you or your loved ones have ever looked into preparing your estate plan, chances are you have heard something about trusts. But what is a trust, and how can you know whether a trust would be beneficial for your family?
In general, a trust is useful when an individual wants to bestow a gift upon someone else, but does not want to make an outright gift to the recipient. In the world of trusts, the giver of the gift is called the “Grantor” or “Settlor” of the trust, and the recipient of the gift is called the “beneficiary.” The Grantor appoints a “Trustee” to manage the trust assets for the good of the beneficiary.
The gift-giver could have a myriad of reasons for wanting the gift to be regulated in some way. Perhaps the beneficiary is a young child, has a developmental disability, has difficulty managing his or her finances responsibly, has a long list of creditors, or struggles with substance abuse issues. In any of those scenarios, a trust can serve to provide for the beneficiary’s ongoing needs without the beneficiary having direct, unfettered access to the gifted funds.
The Grantor establishes the trust by having an attorney draft a document called a trust agreement. The agreement functions as a rule book that the Trustee must abide by. The terms of the agreement outline who the Grantor is, who the Trustee is, and who the beneficiar(ies) will be. It also allows the Grantor to outline what types of expenses the Trustee is authorized to pay for the beneficiary, and under what circumstances. The Trustee’s job is then to follow the Grantor’s instructions as set forth in the agreement.
What are some common types of trusts?
One of the most common types of trusts is called a revocable trust. A revocable trust, sometimes called a living trust, is created by a Grantor while the Grantor is living. Generally speaking, the Grantor of a revocable trust serves as Trustee so long as the Grantor is competent, and is also the sole beneficiary of the trust during the Grantor’s lifetime. The Grantor transfers some or all of his or her assets to the revocable trust, thereby allowing the terms of the trust to control disposition of the asset. For example, a Grantor may wish for his or her home to be managed pursuant to the terms of the agreement. If that is the case, the Grantor will need to work with his or her attorney to prepare a new deed conveying the home to the trust.
Upon the Grantor’s incapacity or death, the agreement designates a successor Trustee, and outlines which beneficiaries will receive the balance of the trust assets after the Grantor has passed away. The revocable trust agreement may even include language retaining funds in trust for a beneficiary after the Grantor’s death. As the name suggests, a revocable trust can be changed while the Grantor is still living. When the Grantor passes away, the trust becomes irrevocable, or unchangeable.
A second common trust is a testamentary trust. Testamentary trusts are so named because they are created within a last will and testament. Unlike revocable trusts, testamentary trusts do not spring into existence until the Testator (the person who created the will) passes away. Instead, the testamentary trust is funded with the Testator’s assets at the Testator’s death. The language of the Testator’s will outlines how and for whom the testamentary trust is to be managed by the Trustee after the Testator’s death.
Perhaps you have a friend or loved one with special needs who receives governmental assistance benefits. If you have ever wondered how to contribute to their care needs without jeopardizing their governmental benefits, a special needs trust may be an appropriate option. Special needs trusts serve to supplement, rather than supplant, governmental benefits. With the help of a knowledgeable attorney, family members and friends of a disabled individual may establish a “third-party” special needs trust, whereby the friend or family member uses their own funds to establish a trust that will provide for additional needs not met by governmental benefits.
A trust can be a valuable tool for a whole host of family and life circumstances. The creation and administration of trusts is a nuanced and complex area of the law, and it is important to consult with an experienced estate planning attorney for advice about your particular circumstances.